New US tax law sparks foreign investment concerns
The provision in the law allowing for additional taxation of foreign investments in the USA is causing concern in financial markets. According to experts, this regulation could deter foreign investors at a time when the United States is particularly reliant on foreign capital to finance its increasing national debt.
The provision is included in the law that has already been passed by the House of Representatives. It permits the U.S. government to impose extra taxes on companies and investors from countries deemed to have restrictive tax policies towards the USA. The new regulations could impact a wide range of foreign entities, including American companies with foreign owners, international corporations with branches in the USA, and individual investors.
According to Greg Peters, co-chief investment officer at PGIM Fixed Income, "This is a market-spooking event, hitting already fragile confidence, particularly from foreign investors." He also added that the United States is creating "self-inflicted wounds" at a time when a large debt needs to be financed. "The timing is really quite poor," he stated, as quoted by the "Financial Times."
Potential consequences for the U.S. economy
According to the law firm Davis Polk, the regulations adopted by the House of Representatives will affect most EU countries, the UK, Australia, Canada, and many other countries worldwide. For foreign investors, this means a 5 percentage point increase in taxes on dividends and interest from American stocks and some corporate bonds annually for four years.
Jonathan Samford, president of the Global Business Alliance, an organisation representing the largest foreign corporations investing in the USA, warns that "The long-term implications [are] going to be quite severe for international companies operating in the United States." He also noted that the provision will not impact bureaucrats in Paris or London. "It’s going to impact American workers in Paris, Kentucky, and London, Ohio," he warned.
Tim Adams, CEO of the Institute of International Finance representing the world's 400 largest banks and financial institutions, stated that "at a time when the administration is actively seeking foreign investment in the US to support job creation, capital formation and reshoring of manufacturing capability, this could be counter-productive."
Uncertainty in financial markets
Analysts at Morgan Stanley claim that Section 899 is likely to pressure the dollar and "disincentivises foreign investment," while JPMorgan notes that it has "significant implications for both US and foreign corporations." A managing director of a large American bond fund admitted that "foreign clients are calling us panicked about this."
"It’s not totally clear whether Treasury holdings will be taxed, but our foreign investors are currently assuming they will be," the expert pointed out.
